Following a focused investment strategy in 2017

The fact that the FTSE/JSE All Share Index barely delivered any returns in the last two years, shows us that when it comes to managing a personal share portfolio, it’s often wise to stick to specific themes.

The easiest way to do this, is to manage your share portfolio in the same way that you would put together a puzzle. If you assemble a 1 000-piece puzzle by simply forcing pieces together, irrespective of whether they fit where you place them or not, you may end up with something that might make Picasso proud, but would definitely be considered a failed attempt when you consider the true purpose of a puzzle. The same principle applies to constructing your personal share portfolio. You can identify a few shares that you like and randomly buy them as you please, and in the process run the risk of ending up with a diversified portfolio that is completely unfocused.

When I mention investing in themes, I’m referring to two things: Analysing your current environment and the focused purchases that will benefit from it. Let ‘s use 2017 as an example:

2017 started with a strengthening in the Rand. Although we ended 2016 with local inflation levels at 6.8%, which is much higher than the 4-6% range where it’s supposed to be, it appeared as though inflation reached its peak and was ready to start its decline. In the meantime, our local GDP figures were released, which showed that our local economy declined by 0.3% in the 4th quarter of 2016. This meant that on an economic level, we simply didn’t grow fast enough and with inflation (along with further strengthening in the Rand) now becoming less of a problem on a monthly basis, the probability of a drop in local interest rates is becoming more likely. A thematic investor would use this opportunity to structure his portfolio accordingly.

Companies that should benefit from this environment, are institutions:

Whose income is not fully dependent on exports;

Whose income grows while experiencing a decrease in expenses as interest rates decrease;

That adjust prices upwards as inflation rises, but keep prices unchanged when it lowers; and/or

Whose production depends on imports (i.e. lower input costs).

Certain sectors stand out when taking the above into consideration:

The banking sector, which came under severe pressure in 2015 (down by 13%), has since made a strong comeback thanks to the strengthening of the Rand. The index is already up by 27% since the end of 2015.

Food inflation lost some speed along with standard inflation as from the end of last year. Food inflation has especially taken a knock with the strengthening of the Rand. Food producers’ input costs should decline, however, which should have a positive effect on the profit margins of companies like Pioneer Foods, Tigerbrands and Zeder.

With the expectation that interest rates will drop, the interest rate relief shouldn’t only affect food groups positively, but retail in general. When we take a look at companies like Truworths, Massmart and Foschini Group, it becomes clear that they have already started to respond positively.

The building and construction sector should also benefit from companies and individuals who will have more disposable income once interest rates start to drop.

By looking at the companies listed on the FTSE/JSE All Share Index that have performed the best so far this year, you will see that investors who focused on the abovementioned theme, have had a very good year so far. Of the top 20 shares that delivered the best returns for 2017, most companies could be found in the banking sector, building and construction sector, retail sector and food producing sector, boasting an average return of 34% for 2017.

I doubt that these themes will change in the short term and I do believe that the most relative value can still be found in these sectors. In short, my message this week is that although diversification lowers your investment risk, it doesn’t mean that your portfolio composition necessarily has to end there.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for any actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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